Fortune Teller

The Failure of Time Pickers

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Fortune Teller

Time pickers, also known as market timers, mistakenly think they can predict the future direction of the market. In their effort to time the market, they attempt to be invested in stocks when the market’s going up, and shelter investments in safe cash, treasury bills or bonds when the market’s going down. Nobel Laureate Robert Merton wanted to estimate what a clairvoyant time picker would earn, so he calculated the value of being invested in the market at the right time and escaping the market declines by hiding in Treasury Bills. If an investor were to stay invested in T-Bills from 1927 through 1978, $1,000 would have grown to $3,600. In the broad market of the New York Stock Exchange Index, $1,000 would have been worth $67,500. However, a time picker with the vision to forecast all the months that the NYSE outperformed T-Bills during the 52-year period would naturally invest in the market at the beginning of each of these months. According to this timing system, $1,000 would have grown to $5.36 billion. Now that is a real incentive to figure out how to pick the right times to invest. It also tells you that if timers really had these psychic powers to see next month's market trends, they would be all over the cover of Forbes, Fortune, BusinessWeek and the Wall Street Journal. But they are not. Is it possible that there might be a few visionary timers out there? Sorry, but they just don't exist. In 1978, the wealthiest individual on record didn't come close to these numbers. Wealth is not created by purposeful market timing. There may be cases where one got lucky for a while, but that is not a reliable strategy for long-term investors.

There are numerous time-picking purveyors who offer their visions of tomorrow through telemarketing, fax broadcasting, newsletters, e-mails, and websites. However, investors should be aware that these market timing newsletters are not regulated by the SEC, whose job it is to protect investors. Ironically, we estimate that millions of dollars are lost every month by investors who flock like sheep to follow the so-called expert timers' guesses as to the next direction of the market. The landmark and definitive study of time pickers was conducted by John Graham at the University of Utah and Campbell Harvey at Duke University. The professors painstakingly tracked and analyzed over 15,000 predictions by 237 market timing investment newsletters from June, 1980 through December, 1992. By the end of the 12.5 year period, 94.5% of the newsletters had gone out of business, with an average length of operations of about four years!

The conclusion of this 51 page (see page 25) analysis could not have been stated more clearly. "There is no evidence that newsletters can time the market. Consistent with mutual fund studies, 'winners' rarely win again and 'losers' often lose again." This clearly indicates that the market’s signals are inaudible to the thousands of time pickers claiming to clearly hear them. Any investment professional who speculates on the market’s future should be relegated to the fortune telling parlor. The three charts below show the following: first, the predictive value of market-timing newsletter forecasts is equal to the flip of a coin; second, over the period studied, the average performance of the newsletters seriously lagged a simple market index; third, the number of newsletters that delivered a higher return than the market was disappointingly small.

Jeffrey Lauderman wrote a BusinessWeek article titled Market Timing: A Perilous Ploy, dispelling the myth of market timing, which he called a guessing game. His 1998 analysis included an interview with Mark Hulbert, who monitors the time pickers’ recommendations. Hulbert's conclusion provided a knockout blow to all 25 newsletters he tracked. None of the newsletter timers beat the market. For the 10 year period ending 1988 to 1997, the time pickers' average return was 11.06% annually, while the S&P 500 stock index earned 18.06% annually and the Wilshire 5000 earned 17.57% annually.

The figure below tells the story.

In another article, the timing system of Douglas Fabian was analyzed by Mark Hulbert. The conclusion: "As a result, this hypothetical timing-only portfolio over the past 15 years has lagged a simple buy-and-hold strategy by a full percentage point per year on an annualized basis." By the way, this was once of the best records of market timing services tracked by Hulbert from 1980 to 1995.

Time pickers vacillate from near zero risk to high risk and then back to zero risk again. A more rational approach for investors is to match their risk exposure to their Risk Capacity™, an approach that is further explained in Steps 10 and 11. Once that match is established, the right time to be in the market is when an investor has money, and the right time to get out of the market is when an investor needs the money.